NEW$ & VIEW$ (19 NOVEMBER 2012)

Ghost  “The only thing we have to fear is fear itself” (FDR)  Ghost


As of Nov. 15, S&P had tallied 476 (96.3%) company reports. Q3 EPS are now seen at $24.35, down another nickel from last week and 3.7% below last year. Q4 estimates slid $0.11 to $25.85.

Trailing 12 months earnings are now $97.75, nearly one dollar ($0.94) lower than at the end of Q2.

U.S. inflation has edged up from 1.7% in August to 2.2% in October. Meanwhile, the S&P 500 Index has retreated 7.9% from its September high. The Index is now selling at 14.1x trailing EPS while the Rule of 20 says fair P/E should be 17.8, a 21% undervaluation.


Fear is obvious in equity valuation: Fiscal cliff, recession, earnings, Europe, taxes, Middle East…


The spread between the percentage of companies raising guidance minus the percentage of companies lowering guidance ended at -5.4 percentage points this earnings season.  This marked the fifth consecutive earnings season in which more companies lowered guidance than raised guidance.  We haven’t seen that happen since the 2001/2002 bear market.  While bad, the final guidance spread of -5.4 percentage points was slightly better than the -5.6 reading we saw last earnings season.  (Bespoke Investment)

Surprised smile  Investment Falls Off Cliff

U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

Half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined. (…)


Corporate executives say they are slowing or delaying big projects to protect profits amid easing demand and rising uncertainty. Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear. (…)

Money  Special Dividends Surge Fourfold as U.S. Tax Increase Looms

(…) From the end of September to mid-November, 59 companies in the Russell 3000 stock index declared a one-time cash payment to shareholders, up from about 15 in the year-earlier period, according to data compiled by Bloomberg. More than a dozen said they acted because of a pending dividend-tax increase. (…)

If Congress takes no action, the dividend tax will revert to the ordinary income rate, which tops out at 39.6 percent. Companies, which according to data compiled by Bloomberg are sitting on $3 trillion of cash, can afford to give back to shareholders and create some goodwill by showing they’re attuned to possible higher taxes, Lowenstein said. (…)

RBC Capital Markets:

(…) we have never seen as big a tax increase in the post-war economy as the one that could hit us when the calendar rolls into the New Year. Rates on dividends could climb from the current 15% level to as high as 44.6% (meanwhile, capital gains tax rates could double). Given this caveat, the high payout ratio, low growth, higher-yielding equities which have shown strong price gains over the past few quarters are at greatest relative risk within the dividend-paying universe.

Consumer fear charted:


Business fear charted (from NFIB):

image image

Storm cloud  U.S. Industrial Output Declines Due To Sandy

large imageHurricane Sandy added to last month’s weakness in industrial output. Industrial production fell 0.4% during October following a 0.2% September increase, last month reported as 0.4%. A 0.2% increase had been expected. Factory output fell 0.9% after a minimal 0.1% September uptick and utility output slipped 0.1% (+0.5% y/y). The Fed indicated that industrial production would have risen roughly 0.6% without the storm and that factory output would have been unchanged.

Markit adds:

imageHowever, even after accounting for the storm impact, the output trend is one of more-or-less stagnation, which is in line with the message from recent business surveys. Unfortunately, the surveys also indicate that the
production trend is likely to have remained weak in November.

Purchasing managers reported that order books showed one of the smallest increases seen over the past three years in October, according to Markit’s Manufacturing PMI survey, which has accurately anticipated trends in official production. Exports continued to fall as a result of tough economic conditions in key export markets. With the eurozone and Japan facing renewed recessions, demand for US manufactured goods looks set to remain weak in coming months, leaving firms reliant on domestic demand.

Meanwhile in the twilight zone:


(…) The toughest issues remain unresolved, and significant differences between the two sides remain, especially the fate of the expiring Bush-era tax rates for the nation’s highest earners. (…)

imageLeaders from both parties and aides to Mr. Obama said they agreed to make concessions to achieve a deal. For Democrats, that included a willingness to curb entitlement programs, such as Medicare. For Republicans that meant a willingness to raise tax revenue. The question for each side, however, is how. (…)

Mr. Obama, House Minority Leader Nancy Pelosi (D., Calif.) and Mr. Reid said at the meeting they wouldn’t support extending the Bush-era tax rates for upper-income Americans as part of any deal. House Speaker John Boehner (R., Ohio) said those tax rates should be extended. People familiar with the meeting said all present knew this issue would be revisited later, and they agreed to set it aside. (…)

That is the crux of the matter.

Perhaps the most remarkable feature of the meeting, aides on both sides of the aisle said, was the absence of partisan jockeying that often marks these summits. (…)

Don’t you worry, that’s coming soon.


Home sales rebounded in Nov  Sales of new homes in Beijing hit 10,314 units in the first half of November, close to a record high in the first 15 days of June.

China Home Prices Gain in Half the Cities as Market Steadies

(…) Prices climbed in 35 of the 70 cities the government tracks, compared with 31 in September, according to data from the statistics bureau yesterday. Prices fell in 17 cities. (…)

Home prices rose in 12 cities from a year earlier, the same as in September, the data showed. (…)

Contracted sales at 11 major developers were 57.3 billion yuan ($9.2 billion) in October, up 24 percent from September and 41 percent from a year earlier, according to Ryan Li, an analyst at JPMorgan Chase & Co. in Hong Kong. It was the best month since developers started releasing monthly data in January 2009.

China’s housing sales climbed 6.6 percent to 3.88 trillion yuan in the first 10 months, while investment in homes, office buildings, malls and other real estate gained 15.4 percent to 5.76 trillion yuan, National Bureau of Statistics’ data showed. (…)

China’s home appliance sales pick up  Buoyed by subsidies on energy-saving products and favorable policies for rural consumers, China saw home appliance sales pick up in September.

(…) domestic consumers purchased 3.65 million units of washing machines, representing a 1.4-percent increase year on year, while exports expanded 18 percent to 1.98 million units, according to the data.

The September figures marked the first time that sales of air conditioners have expanded in the past seven months, while the surge in sales of refrigerators in the month trumped market expectations, the center said.

The pick-up came as rural consumers kicked off a buying spree ahead of the end of the rural subsidy program, which gives them subsidies equal to 13 percent of the price of designated types of home appliances, the center said. The program will end at the end of this year.

Sales were also boosted after the government announced in May that it would earmark 26.5 billion yuan ($4.21 billion) to subsidize the purchases of energy-saving electrical appliances for a one-year period, a program designed to cover a wider population, it added.


Dan Yergin needed a month to summarize just about all that has been written on “The U.S. Oil Revolution” (see my Oct. 18 post: Facts & Trends: The U.S. Energy Game Changer). The FT graciously allowed him to inform its readers about what’s happening in the world of energy: Winking smile

Daniel Yergin: US energy is changing the world again

(…)  The economic effects of this revolution in unconventional forms of production are already apparent. The most immediate has been in employment – more than 1.7m jobs have been created. The development of shale gas and tight oil involves long supply chains, with substantial sums being spent across the country. (…)

The impact will increase. By 2020, 3m jobs could be created by the energy revolution. Most will have salaries higher the average US job. This means more money for cash-strapped governments. By that year, government revenues from taxes and royalties arising from unconventional oil and gas could be over $110bn, according to analysis by IHS.

The other increasingly important impact is on global competition. US natural gas is abundant and prices are low – a third of their level in Europe and a quarter of that in Japan. This is boosting energy-intensive manufacturing in the US, much to the dismay of competitors in both Europe and Asia. Billions of dollars of investment are now slated for US manufacturing because of this inexpensive gas.

What about oil? (…) One geopolitical impact is already clear. Rising US oil production, along with increased Saudi output, has helped provide offsetting supplies that have made the sanctions on Iranian oil much more successful than anticipated a year ago.

But US engagement in the Middle East is not simply about oil imports. The US buys only about 12 per cent of its oil from the Gulf. Its interest is less about how many barrels flow to the US and more about the overall accessibility and stability of supplies on which the world economy depends. After all, the US will be affected by any disruptions to the global market that drive up prices. (…)

The skeptical view via FT Alphaville:

Here are the IEA’s actual US oil production forecasts, in a “New Policies” scenario:

US oil production New Policies scenario - IEA

The ‘New Policies’ scenario includes no new greenhouse gas emission policies beyond what was committed to by mid-2012; average 3.5 per cent world GDP growth to 2035; and average crude oil prices approaching $125/barrel, in 2012 dollars, by 2035.

However, Neil Beveridge and colleagues at Bernstein Research have been sceptical about the predicted shale oil boom for some time, as highlighted in their note about the Bakken shale formation in Montana which we wrote about in August.

They remain unmoved by the IEA’s forecasts, foreseeing an earlier peak and a quicker decline of US oil output:

The renaissance in US liquids production has been remarkable, growing by over 1mmbls/d to reach 8.5mmbls/d this year over the past three years. By 2015 we expect that the US will produce close to 10.5mmbls/d given further growth in shale liquids. This will be comparable to Saudi production but only for a brief period and by 2020 we forecast that US production will have declined back to 9mmbls/d. In contrast, the IEA expect US liquids production to keep growing to 11.1mmbls/d by 2020 following which the US production will plateau and by 2025 start to decline.

Beveridge explains:

As we have noted, shale liquids plays are far rarer than their related shale gas plays and already we are seeing decline in some of the core areas of the Bakken oil field highlighting the early onset of maturity in some of these plays.

U.S. Oil Demand at Lowest October Level in 17 Years

U.S. oil demand fell 2.3% in October from a year earlier, to 18.4 million barrels a day, the American Petroleum Institute said Friday.

Demand was the weakest in October in 17 years, the trade group said, and was up 1.3% from September. Demand in the first 10 months of the year was 2.1% below the same period in 2011 at 18.562 million barrels a day.

(…) “The simple fact is that unemployment remains high and economic growth has been extremely modest. Petroleum demand is reflecting that.”

Demand for gasoline, the most widely used petroleum product in the world’s biggest oil consumer, fell 0.2% from a year earlier to 8.627 million barrels a day and was the weakest in October since 2000. Ten-month average demand of 8.744 million barrels a day was down 0.4% from the same time in 2011. (…)

Imports of crude oil fell by 4.5% to average just over 8.5 million barrels per day in October.

Crude oil production was 13.3% above year-ago levels, at 6.652 million barrels a day, the highest level in the month since 1994. (…)

America’s Oil Boom: Shape Up or Ship Out  America’s newfound natural-gas bounty has already sparked arguments over whether or not to export it. Soon, it will be oil’s turn.

(…) U.S. crude-oil exports are heavily restricted. Refined products such as gasoline can be shipped abroad more easily—indeed, the U.S. became a net exporter of these last year for the first time since 1949. (…)

Pressure to export crude oil won’t grow because the U.S. will suddenly no longer need imports. (…)  Rather, it is a matter of logistics.

The rapid increase in onshore U.S. oil output in states such as North Dakota, as well as rising Canadian oil-sands output, has created a glut in the Midwest. As a result, domestic grades sell for less than international benchmarks such as Brent. (…)

While refiners, pipeline operators and rail companies are investing to get these cheaper crudes toward markets like the East Coast, the current logistical setup still favors the Gulf of Mexico coast. This region is home to almost half of U.S. refining capacity. Gulf Coast refineries are running flat out already. Moreover, many are set up for a world in which the U.S. imported lots of heavy, high-sulfur crude oil, whereas much of the output from expanding onshore fields is light and low-sulfur or “sweet.”

Just under 800,000 barrels a day of light, sweet crude is currently imported to the Gulf Coast for processing, according to analysts at Raymond James. As onshore output of oil increases, these light, sweet imports will be replaced by domestic barrels. Raymond James estimates this will happen by the second half of 2013.

Gulf Coast refiners will tweak their plants to let them use more domestic light, sweet crude. But a growing surplus of these barrels in the Midwest with few easy options to get to market looks unavoidable.

So expect a push by exploration and production companies to ease export restrictions on oil in the same way they are pushing for natural gas. Gas accounts for about two-thirds of the E&P sector’s output. But profits—and stock-price performance—hew more to oil.

Equally, expect the other part of the industry, refiners, to resist. Just as petrochemical firms such as Dow Chemical profit from the glut of domestic gas, refiners able to process cheap domestic crude are enjoying a windfall. Looked at on a rolling three-month average, the premium for gasoline sold in the Gulf Coast region over WTI is around $28 a barrel, close to its highest ever.

That margin could be a political liability. It is easy to envisage export-ban supporters arguing it is unjust to sell domestic crude overseas while Americans pay high gasoline prices. But as that margin shows, the benefits of cheaper crude flow first to refiners. Since gasoline produced on the Gulf Coast can be sold anywhere, Americans must compete for it—that is, pay up. Changing that would actually require raising barriers to refined-product exports, protectionism that neither the world nor refiners would welcome. (…)


The Eurozone’s economic and political mess is rapidly morphing into a social disaster of potentially huge proportions. Europe’s social fabric will likely change radically (literally) in coming months and years. This FT editorial only sets the stage.

Common casualty

This week, the consequences of the eurozone’s misguided policies were brought home to the politicians overseeing them – politically and economically. On Wednesday, millions of workers struck across the eurozone to protest against the public sector austerity practised by the currency union’s governments. On the very same day, new numbers revealed that the eurozone has fallen back into recession. (…)

Behind the cold statistics lie strains on the social fabric. These burst into the open with the street protests which at times erupted into violence. Trade unions have special interests to defend against much-needed structural reforms. But their actions also reflect a deeply felt suffering from the job losses and ruination caused by the downturn and the collapse of the housing bubble in the countries that had one. Spain, for example, has been forced into emergency policy making to address an accelerating homelessness crisis.

This economic and political damage was caused by a wrong-headed morality tale that attributed the debt crisis to fiscal indiscipline, when in reality profligacy was a sin most promiscuously practised by private lenders and borrowers. (…)

This week reminds us that politicians must eventually listen to voters. The future hinges on next year’s crucial elections in the eurozone’s first and third economies: Germany and Italy.

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